The External Environment:
Opportunities, Threats,
Industry Competition and
Competitor Analysis
Chapter Three
© 2006 by Nelson, a division of Thomson Canada Limited.
3-1
Strategic
Inputs
Chapter 4
Internal
Environment
Strat. Intent
Strat. Mission
Strategy Formulation
Chapter 5
Bus. - Level
Strategy
Chapter 6
Chapter 7
Competitive Corp. - Level
Dynamics
Strategy
Chapter 9
Chapter 8
Acquisitions & International
Strategy
Restructuring
Strategic
Outcomes
Strategic Actions
Chapter 3
External
Environment
Chapter 2
Above Average
Returns
Chapter 10
Cooperative
Strategies
Chapter 1
Strategic
Competitiveness
The Strategic
.
Management
Process
.
Strategy Implementation
Chapter 11
Corporate
Governance
Chapter 12
Structure
& Control
Chapter 13 Chapter 14
Strategic Entrepreneurship
Leadership & Innovation
Feedback
© 2006 by Nelson, a division of Thomson Canada Limited.
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The External Environment: Opportunities,
Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives
1. Explain the importance of analyzing and
understanding the firm’s external environment.
2. Defining and describing the general
environment and the industry environment.
3. Discuss the four activities of the external
environmental analysis process.
4. Name and describe the general environment’s
six segments.
© 2006 by Nelson, a division of Thomson Canada Limited.
3-3
The External Environment: Opportunities,
Threats, Industry Competition and Competitor
Analysis
Knowledge Objectives – continued…
5. Identifying five competitive forces and
how they determine an industry’s profit potential.
6. Define strategic groups and their influence on
the firm.
7. Describe what firms need to know about their
competitors and different methods used to
collect intelligence about them.
© 2006 by Nelson, a division of Thomson Canada Limited.
3-4
The External Environment
Environment
Sociocultural
Industry
Environment
Threat of new entrants
Power of suppliers
Power of buyers
Product substitutes
Intensity of rivalry
Competitor
Environment
Technological
General
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3-5
General Environment Components
Demographic
Segment
 Population size
 Age structure
 Ethnic Mix
 Geographical Distribution
 Income distribution
 Immigration
Sociocultural
Segment
 Women in the workforce
 Workforce diversity
 Environmental Concerns
 Work life quality attitudes
 Concerns about the environment
 Shifts in 2 career preferences
 Shifts in preferences regarding product
/ service characteristics
Political/Legal
Segment
 Competition Laws
 Labour Laws
 Taxation laws
 Education philosophies & policy
 Government econ. involvement /
ownership Philosophies
 De-/ Regulation philosophy
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3-6
General Environment Components
Economic
Segment
 Inflation & interest rates
 Personal savings rate
 Business savings rates
Technological  Product innovations
Segment
 Process Innovations
 Applications of knowledge
Global
Segment
 Important political events
 Critical global markets
 Trade deficits or surpluses
Budget deficits or surpluses
 Gross domestic product
 Focus of private & governmentsupported R&D expenditures
 New communication
technologies
 Newly industrialized countries
 Different cultural and institutional
attributes
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The Industry Environment
The set of factors that directly influences a firm, it’s
competitive actions & competitive responses:
1. The threat of new entrants
2. The power of suppliers
3. The power of buyers
4. The threat of product substitutes
5. The intensity of rivalry among competitors
© 2006 by Nelson, a division of Thomson Canada Limited.
3-8
Competitor Analysis
Predicting the dynamics of competitor actions,
responses and intentions.
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The I/O Model of Superior Returns
The Industrial Organization Model suggests
that above-average returns for any firm are
largely determined by characteristics outside
the firm.
The I/O model largely focuses on
industry attractiveness or structure of the
external environment rather than internal
characteristics of the firm.
© 2006 by Nelson, a division of Thomson Canada Limited.
O
I
3-10
The I/O Model of Superior Returns
Action required:
External
Environment
General Environment
Industry Environment
Competitive
Environment
Study the external
environment,
especially the
industry environment.
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3-11
*
an
The I/O Model of Superior Returns
External
An Attractive
Environment
Industry
Action required:
Locate an industry with
high potential for
above-average returns.
General Environment
Industry
Environment
An industry
whose
structural characteristics
Competitive
suggest above-average
Environment
returns are possible
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3-12
*
an
The I/O Model of Superior Returns
External
Environment
An Attractive
Action required:
I.d. strategy called for
by the industry to earn
above-average returns.
Industry
General
Environment
Strategy
Industry
Environment
Formulation
An industry
whose
Competitive
structuralSelection
characteristics
of a strategy
Environment
suggest above-average
linked with abovereturns are
possible
average
returns in a
particular industry
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3-13
*
an
The I/O Model of Superior Returns
External
Environment
An Attractive
Action required:
Develop / acquire assets
and skills needed to
implement the strategy.
Industry
General
Environment
Strategy
Industry
Environment
Formulation
An industry
whose Assets and Skills
Competitive
structural characteristics
Selection of a strategy
Environment
suggest above-average
linked with
Assets
aboveand skills
returns areaverage
possiblereturns
required
into
a
particularimplement
industry a chosen
strategy
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3-14
*
an
The I/O Model of Superior Returns
External
Environment
An Attractive
Action required:
Use the firm’s strengths
(its assets or skills) to
implement the strategy.
Industry
General
Environment
Strategy
Industry
An Environment
industryFormulation
whose Assets and Skills
Competitive
structural characteristics
Selection of a strategy
Strategy
Environment
suggest above-average
linked with
Assets
aboveand skills
Implementation
returns areaverage
possiblereturns
required
into
a
particularimplement
industry
a chosen
Selecting
strategic actions
strategylinked with effective
implementation of the
chosen strategy
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3-15
*
an
The I/O Model of Superior Returns
External
Environment
An Attractive
Action required:
Maintain selected
strategy in order to outperform industry rivals.
Industry
General
Environment
Strategy
Industry
Environment
Formulation
An industry
whose Assets and Skills
Competitive
structural characteristics
Selection of a strategy
Strategy
Environment
suggest above-average
linked with
Assets
aboveand skills
Implementation
returns areaverage
possiblereturns
Superior
required
into
a
Returnsactions
particularimplement
industry
a chosen
Selecting
strategic
strategylinked withEarning
effectiveof aboveimplementation
of the
average
returns
chosen strategy
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*
an
External Environmental Analysis
The external environmental analysis process
should be conducted on a continuous basis.
This process includes four activities:

Scanning
 Monitoring
 Forecasting
 Assessing
Identifying early signals of environmental
changes and trends
Detect meaning by ongoing observations of
environmental changes and trends
Developing projections of anticipated
outcomes based on monitored changes and
trends
Determining the timing & importance of
environmental changes and trends for
firms' strategies & their management
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3-17
Porter’s 5 Forces Model of Competition
Threat of
Threat
ofNew
New
Entrants
Entrants
The above image Copyright © 2001 Corel & Jerry Sheppard All rights reserved.
© 2006 by Nelson, a division of Thomson Canada Limited.
3-18
Threat of New Entrants
*
* Product Differentiation
* Capital Requirements
* Switching Costs
Barriers
Barriers
Entry
to to
Entry
*
*
*
*
Economies of Scale
Access to Distribution Channels
Cost Disadvantages Independent of Scale
Government Policy
Expected Retaliation
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3-19
*
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
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3-20
*
Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Supplier industry is dominated by a few
firms.
* Suppliers’ products have few
substitutes.
* Threatening to raise
prices or to reduce
* Buyer is not an important customer to
quality
supplier.
Powerful suppliers
* Suppliers’ product is an important
can squeeze industry
input to buyers’ product.
profitability if firms
* Suppliers’ products are differentiated.
Suppliers exert
power in the
industry by:
*
are unable to
recover cost
increases
Suppliers’ products have high
switching costs.
Supplier poses credible threat of
forward integration.
*
*
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3-21
*
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Bargaining
Power of
Buyers
© 2006 by Nelson, a division of Thomson Canada Limited.
3-22
*
Bargaining Power of Buyers
Buyer groups are likely to be powerful if:
*
*
*
*
*
*
*
*
Buyers are concentrated or purchases are
large relative to seller’s sales
Purchase accounts for a significant
Buyers compete
fraction of supplier’s sales
with supplying
Products are undifferentiated
industry by:
Buyers face few switching costs
Buyers’ industry earns low profits
Buyer presents a credible threat of
backward integration
* Bargaining down prices
* Forcing higher quality
* Playing firms off of
each other
Product unimportant to quality
Buyer has full information
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3-23
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Threat of
Substitute
Products
© 2006 by Nelson, a division of Thomson Canada Limited.
3-24
*
Threat of Substitute Products
Keys to evaluating substitute products:
*
Products
with similar
function
limit the
prices firms
can charge
Products with improving price /
performance tradeoffs relative to
present industry products
For Example:
Electronic security systems in
place of security guards
Fax machines or e-mailed
attachments in place of
overnight mail delivery
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3-25
Porter’s 5 Forces Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants
Bargaining
Power of
Suppliers
Rivalry Among Competing
Firms in Industry
Bargaining
Power of
Buyers
Threat of
Substitute
Products
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3-26
*
Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways
*
*
*
*
*
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions
Occurs when a firm is pressured or sees an opportunity
*
*
Price competition often leaves entire industry worse off
Advertising battles may increase total industry
demand, but may be costly to smaller competitors
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3-27
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when
* Numerous or equally balanced competitors
* Slow growth industry
* High fixed costs
* High storage costs
* Lack of differentiation or switching costs
* Capacity added in large increments
* Diverse competitors
* High strategic stakes
High exit barriers
*
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3-28
Rivalry Among Existing Competitors
High Exit Barriers are economic, strategic and
emotional factors which cause companies to
remain in an industry even when future profitability
is questionable.
*
*
*
*
*
Specialized assets
Fixed cost of exit (e.g., labour agreements)
Strategic interrelationships
Emotional barriers
Government and social restrictions
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3-29
Strategic Groups
A set of firms emphasizing similar strategic
dimensions to use a similar strategy
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3-30
Strategic Groups
1. The more intense the rivalry of competitors
within a group the greater the threat to each
firms profitability.
2. The strengths of the 5 competitive forces differ
across strategic groups. Thus firms within
various strategic groups have different pricing
policies.
3. The closer groups are in terms of their
strategies & dimensions emphasized, the
greater the chance competitive rivalry between
groups.
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3-31
Competitor Environment
Competitor intelligence is the ethical gathering of
needed information and data about competitors’
objectives, strategies, assumptions, and
capabilities.
• What drives the competitor as shown by its future
objectives,
• What the competitor is doing and can do as revealed
by its current strategy,
• What the competitor believes about itself and the
industry, as shown by its assumptions,
• What the the competitor may be able to do, as shown
by its capabilities.
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Competitor Analysis
Future Objectives:
Future objectives
• How do our goals compare
with our competitors’ goals?
• Where will the emphasis be
placed in the future?
• What is the attitude toward
risk?
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3-33
Competitor Analysis
Current Strategy:
Future objectives
Current strategy
• How are we currently
competing?
• Does this strategy support
changes in the competitive
structure?
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Competitor Analysis
Assumptions:
Future objectives
Current strategy
Assumptions
• Do we assume the future will
be volatile?
• Are we operating under a
status quo?
• What assumptions do our
competitors hold about the
industry and themselves?
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Competitor Analysis
Future objectives
Current strategy
Capabilities:
• What are our strengths and
weaknesses?
• How do we rate compared to
our competitors?
Assumptions
Capabilities
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3-36
Competitor Analysis
Future objectives
Response
Response:
Current strategy
• What will our competitors do
in the future?
Assumptions
• Where do we hold an
advantage over our
competitors?
Capabilities
• How will this change our
relationship with our
competitors?
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